Edmond de Rothschild Prifund Alpha Uncorrelated: Banque Privée Edmond de Rothschild

Winner: Best specialist fund of hedge funds over 10 years; Shortlisted: Best specialist fund of hedge funds over three years

A lot has happened to the European fund of hedge funds (FoHF) world since Edmond de Rothschild launched its first FoHF in 1969. The environment has completely changed for the Swiss manager, which now runs $9.3 billion in FoHF and multi-manager products.

One of the biggest changes post-2008 has been the severe contraction of Europe's FoHF industry. Not only have the number of products shrunk, significant consolidation as well as attrition rates have combined with the major loses sustained in 2008 to reduce overall assets under management (AUM) considerably.

Despite this Alexandre Pini, first vice president at Banque Privée Edmond de Rothschild (Geneva), is confident FoHFs have a brighter future ahead of them, particularly once the EU's rules for alternative funds, the alternative investment fund managers (AIFM) directive, is clarified.

"I firmly believe that the reasons which are today pushing US institutions into investing in [hedge funds] apply in Europe as well," says Pini, who is also portfolio manager of Prifund Alpha Uncorrelated, a global multi-strategy FoHF run by the bank.

The low interest rate environment where economic growth is at best anaemic and equity markets are not growing as they did in the past are all good reasons for institutions to try to find a more creative way of deploying assets, according to Pini. He is confident European investors will follow the US lead and start committing more capital to hedge funds and FoHFs in future and, hopefully, to the bank's products as well.

Prifund Alpha Uncorrelated is one of 40 funds in the Prifund range offered by the bank. These cover traditional as well as alternative funds and include single-manager funds as well as FoHFs. The range was launched in the early 1990s when the bank wanted to renew its FoHF offering.

Creating the Prifund umbrella, of which Uncorrelated is a part, was based on a few "very simple ideas", explains Pini. The first was that the hedge fund industry from its inception was predominantly made up of stock-pickers with equity long/short dominating. But more and more strategies began to emerge offering different types of uncorrelated return.

"We thought at the time that it was sound to have portfolios able to perform some kind of asset allocation," says Pini. "This was the first thing. The second one was at the time we needed to go onshore." Luxembourg became the domicile for the Prifund range.

The fund has 184 funds through which it can gain exposures at any time. The FoHF particularly likes exposure to arbitrage and event driven, global macro and commodity trading advisers (CTAs) strategies. There are no restrictions on allocations by sector or geography.

As the name suggests, the fund's core mandate is to provide uncorrelated returns over an economic cycle.

At least 50% of the portfolio is usually in arbitrage and event driven strategies at any time. At the end of October 2012, 71% of the portfolio was in these strategies, with 39% of this allocated to multi-strategy managers. This is primarily because of the flexibility that multi-strategy managers have to move in and out of asset classes and geographies in response to events in the markets.

"But there is another reason, which is quite important," says Pini. "Multi-strategy managers tend to be large asset managers, large management companies with several hundred people, state of the art operations and a lot of brain power."

These types of management companies are a good place to deploy capital, particularly as robust operational risk management is now such a high priority.

Other preferred strategies include credit, ranging from structured to long/short as well as equity event driven, merger arbitrage and special situations.

CTAs and macro managers fall into the category that Pini refers to as traders, with 20% of the portfolio allocated to these strategies at the end of October 2012.

Long short/equity across the board has generally not been a favoured strategy, making up only 3%-4% of the total portfolio allocation throughout 2012. Allocations have fluctuated up or down by one or two percentage points over the course of 2012 but there have been no major changes.

This reluctance to have more exposure to equity long/short is changing. The fund has slowly been increasing its allocation to equities and decreasing its investments in fixed income strategies. "Obviously [equity strategies] bring with them a bit of correlation," says Pini. He believes the fixed income allocation needs to be pulled because of the low interest rates while gaining more exposure to equity, despite the volatility and increased correlation.

Part of this effect is mitigated through allocations to global macro and CTAs although Pini admits "it is a difficult balancing act".

Managers are selected on the basis of having experience and must have been through at least one market cycle. Having an alignment of interests between the manager and investors is also important. To demonstrate this a manager must have their own capital invested in the fund.

The human element is an integral part of manager selection. Decisions to invest are based as much on the quality of the people working in the management company as on quantitative data.

The fund has performed positively in 2012, up 4.3% at the end of October. Although performance was hit in 2008 (down 16.6%) and again in 2011 (down 6.9%), inception to date, the fund has remained in positive territory. However, AUM has taken a hit in line with the rest of the European FoHF industry.

While memories of 2008 are still raw for many investors, this is not the biggest factor holding back growth for the European FoHFs industry, believes Pini. He thinks the biggest problem facing FoHFs trying to raise assets is regulation.

[Pictured: Alexandre Col, Banque Privée Edmond de Rothschild (Geneva)]

Level 2 of the AIFM directive, which provides the detailed rules needed for implementation, was still not finalised nearly six months out from the implementation date of July 2013. The uncertainty and uneasiness surrounding some of the rules implementing the legislation has deterred investors from committing money to the industry.

"AIFMD is still in limbo. We are still waiting for some clarity about that one. You have to understand the institutional mindset. If they do not have the regulation, if they do not know what they would be able to do and to invest in six or 12 months' time, they just refrain from investing," says Pini. "This single factor, I think, is weighing hugely on the European market."

Although its main office is in Switzerland which is outside the EU, Banque Privée Edmond de Rothschild knows it will need to comply with the directive to continue to market to EU investors. "We want to be AIFMD compliant. We will be because we have teams and people in Paris, in Luxembourg, in London and we will be doing what is needed."

In response to the impending regulations the bank is reorganising its FoHF business so that it is more integrated with its other activities and more pan-European.

In locations that do not have that regulatory uncertainty hanging over them, such as Edmond de Rothschild's home market in Switzerland, assets are being allocated.

Institutions allocating to FoHFs are also changing the way they do this, and overall the industry is in a state of flux, says Pini. Many that invested in commingled funds before 2008 are moving into managed accounts. At the same those that were in managed accounts also had a bad experience in 2008 and are moving back into commingled funds.

"We are agnostic to [delivery of product] because we offer the whole spectrum. What we do see is that the managed accounts activity is growing faster. It is growing faster because institutions like them."

Overall he remains optimistic about the future of Europe's FoHF business and in particularly for that of Edmond de Rothschild.

Watch
Video interview: Alexandre Col, head of investment fund department, Banque Privée Edmond de Rothschild

Read more
Profile: Banque Privée Edmond de Rothschild - Tenth European Performance Awards 2010 Winner: Best group

Fund facts:
Name of fund: Edmond de Rothschild Prifund Alpha Uncorrelated
Portfolio managers: Alexandre Pini and Alexandre Col
Management company: Banque Privée Edmond de Rothschild (Geneva)
Contact information: Banque Privée Edmond de Rothschild, Investment Fund Department, 18 rue de Hesse - CH-1204 Geneva ([phone]; [e-mail]; www.edr-prifund.ch)
Launch date: May 23, 2001
Strategy: global multi-strategy fund of hedge funds
Net cumulative performance since inception:
Share classes: US dollar, euro, Swiss franc and sterling
Domicile: Luxembourg
Management fee: 1.25%
Performance fee: none
Fund administrator: Banque Privée Edmond de Rothschild Europe (Luxembourg)
Legal counsel: Elvinger, Hoss & Prussen (Luxembourg)
Auditor: Deloitte (Luxembourg)
Subscription notice: by the 26th day of the month
Redemption: notice by the 24th day of the previous month